May 9, 2014

Market Perspectives: overview

Economic, trade and market impacts. The current geopolitical consequences of the crisis in Ukraine extend well beyond its borders. A few key facts The is long and complex. However, relatively recent and significant events about Ukraine: include independence from the then Soviet Union in August 1991. Since that time, Ukraine has struggled to achieve fair and open elections. For example, in 2004 the “Orange Movement” (named • GDP: $337B after the colors of the protesters) tossed out the results of a “rigged” national election. New • Population of Ukraine: elections, internationally monitored, put in Viktor Yanukovych as president. 45 million (77% Ukrainian, As time passed, became increasingly disappointed with his leadership as he leaned the 17% Russian) country to closer ties with Russia. Yanukovych was forced from office in February 2014. This was the • Population of capital city flint that sparked Russia to move into eastern Ukraine and take control of the Crimea region at the Kiev: 2.8 million beginning of March. Crimea is not only geographically closer to Russia, but its Russian population • Global ranking: 39th in size density is much higher than in overall Ukraine. (similar in size of Texas) After the move into Crimea, tensions continued to increase, diplomatic initiatives failed, and • High % of arable land economic sanctions on Russia have started. These pressures to date have produced erratic (55%); 6th in the world responses from Russia, ranging from more accommodative to more hardline. in wheat exports Ukraine’s economy is relatively small and while it had started to deteriorate already, the confrontation only worsened its economic performance. For example, year-over-year GDP fell from 3.3% in Q4 2013 to -1.1% in Q1 2014. Additionally, the IMF had to provide an aid package. The economy of Russia, while much larger (over $2.2 trillion), is now in near recession mode (year-over-year GDP fell from 2.0% in Q4 2013 to 0.75% in Q1 2014) and its central bank has dramatically raised rates (from 5.38% on March 1 to 7.25% on April 30) to try and staunch the plunge in the Russian currency. A key economic issue in this conflict involves Russia’s central role as the main energy supply source not only to Ukraine but much of Europe in general. Any disruption in energy supplies from Russia broadly hurts Europe and hits Russia’s pocket book, as well. With the uncertainty that came with Russian troops moving into Crimea, oil prices were volatile, with prices spiking nearly 2% in just two days. Russia supplies 20-40% of the oil and gas needs of several European countries, and much of the critical oil and gas pipeline infrastructure runs right through Ukraine on its way to destinations like Germany, France, Poland and south to Italy.

Gas pipelines infrastructure RUSSIA Main gas pipelines through Ukraine Country Top EU recipients of Russian gas UKRAINE transiting Ukraine

% of gas consumption imported from Russia

Sources: Chatham House, CSIS, Inogate, IEA Trade relationships (%)

Beyond oil and gas, a more general trade slowdown could be Russia Ukraine EU Germany another unintended consequence of these disturbances. Substantial Export Import Export Import Export Import Export Import import/export relationships inextricably link Russia to Ukraine, to from to from to from to from the Eurozone, Germany et al. For example, in reading the Trade N/A N/A 5.3 5.7 49.8 41.9 9.8 12.1 Relationships table from left to right, 5.3% of Russia’s exports go to Russia Ukraine and 5.7% of Russia’s imports come from Ukraine. 49.8% of Ukraine 24.1 32.4 N/A N/A 24.5 31.0 2.1 8.0 Russia’s exports go to the Eurozone and 41.9% of Russia’s imports come from the Eurozone, etc. EU 2.5 4.4 0.6 0.3 N/A N/A 13.1 13.9 Germany 2.9 4.3 0.5 0.1 56.5 65.5 N/A N/A This crisis also roiled stock and bond markets, particularly at the local country level. Both the Ukrainian and Russian stock Sources: Bloomberg L.P., BMO Global Asset Management exchanges were hard hit initially, and both have recovered to different degrees (Ukraine’s more than Russia’s). The STOXX Index, a broad proxy for European stocks, also sold off on this outbreak, as did the DAX exchange in Germany. The Ukraine and Russia stock markets impact on U.S. stocks was brief and more of an initial reaction to the news rather than something sustained. However, the Index level demand for Treasurys rises with events like this, and U.S. Treasury 1,500 yields did fall surrounding the onset of this conflict from 2.74% Russia (RTS Index) on February 24 to 2.60% on March 3. Ukraine (UX Index) -15.5% Returns (%) 1,200 Height of crisis Post crisis 3/1 – 3/14/14 3/14 – 4/1/14 S&P 500® -0.88 2.46 -13.3% 900 STOXX -4.47 4.57 DAX -6.56 6.04

YTD currency depreciation (%)1 600 Russian Ruble February 2014 March 2014 April 2014 May 2014 -8.0 -29.2 Sources: Bloomberg L.P., BMO Global Asset Management 1 as of 5/5/14 Sources: Bloomberg L.P., BMO Global Asset Management As noted above, currencies plunged during this crisis. However, in the past few days prices have stabilized across stock, bond, oil and currency markets.

In the last year, we have watched as geopolitical events grab the headlines and wrench markets. Last August, Syria set off a 2-3% decline in U.S. stocks, and earlier this year riots in Turkey coupled with problems from South Africa to Argentina pushed markets back 5-6%, as well. Hopefully, this current storm continues to calm. However, national are just three weeks away, and more volatility could be in store.

S&P 500® Index (S&P 500®) is an unmanaged index of large-cap common stocks. STOXX Europe 600 Index (STOXX) represents 600 large, mid and small capitalization companies across 18 countries of the European Region. Deutsche Boerse Ag German Stock Index (DAX) The German Stock Index is a total return index of 30 selected German blue chip stocks traded on the Frankfurt Cash Index (RTS) is cap-weighted composite index calculated based on prices of the 50 most liquid Russian stocks of the largest and dynamically developing Russian issuers presented on the . Ukrainian Equities Index (UX) is an indicator calculated by . The Index is calculated during the trading session every 15 seconds. Index constituents are comprised of the most liquid stocks of Ukrainian companies. Investments cannot be made in an index. This is not intended to serve as a complete analysis of every material fact regarding any company, industry or security. The opinions expressed here reflect our judgment at this date and are subject to change. Information has been obtained from sources we consider to be reliable, but we cannot guarantee the accuracy. This publication is prepared for general information only. This material does not constitute investment advice and is not intended as an endorsement of any specific investment. It does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. Investors should seek advice regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. Investment involves risk. Market conditions and trends will fluctuate. The value of an investment as well as income associated with investments may rise or fall. Accordingly, investors may receive back less than originally invested. Past performance is not necessarily a guide to future performance. BMO Global Asset Management is the brand name for various affiliated entities of BMO Financial Group that provide investment management, retirement, and trust and custody services. Certain of the products and services offered under the brand name BMO Global Asset Management are designed specifically for various categories of investors in a number of different countries and regions and may not be available to all investors. Products and services are only offered to such investors in those countries and regions in accordance with applicable laws and regulations. BMO Financial Group is a service mark of Bank of Montreal (BMO). Investment products are: NOT FDIC INSURED — NO BANK GUARANTEE — MAY LOSE VALUE. © 2014 BMO Financial Corp.

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